The departure of Bernard Byrne from AIB, where his pay was capped, for Davy and the potential rewards of an uncapped salary and bonuses, came hard on the heels of chief financial officer Mark Bourke announcing he would quit.

The departure of Bernard Byrne from AIB, where his pay was capped, for Davy and the potential rewards of an uncapped salary and bonuses, came hard on the heels of chief financial officer Mark Bourke announcing he would quit.

Yesterday's announcement prompted AIB chairman Richard Pym, who has long advocated the lifting of remuneration restrictions and ending State control over the bank, to describe it as a "grim day" in his life.

He and others in the financial services industry argue that the caps mean Irish banks lose out in a race for talent to uncapped rivals here and to foreign banks, especially those from the UK who might relocate as Brexit looms.

Yesterday's announcement would appear to support those arguments as AIB's stock plunged as much as 10pc, wiping hundreds of millions of euro off the value of the State's remaining 70pc stake in the bank.

The message was clear - the Government was shooting itself in the foot with the pay caps and there was a direct cost to taxpayers as a result. Much of the loss was later reversed, but the stock was still down 2.63pc, equating to a loss of around €220m for the Exchequer.

While it is a fact that Ireland's salary caps and bonus regime are tougher than those of other countries, it is also true that the cost of Ireland's bank-led financial crisis was also greater than elsewhere at €65bn.

The regime here is based on European Union regulations with some important tweaks and applies to AIB, Bank of Ireland and Permanent TSB, although Bank of Ireland's Francesca McDonagh managed to evade the caps and her compensation is in line with her predecessor Richie Boucher's package, which was exempt from the restraints because it predated the 2009 rules.

Under the State's regulations, there is a prohibition on the payment of incentives and limits on pensions and termination payments, so-called 'golden parachutes', as well as a €500,000 pay cap and in addition an 89pc 'super tax' on incentive pay in the sector.

That is tougher than in Britain, where 'covered institutions' have made bonus payments, though in many cases those getting them have waived them, sometimes under public pressure.

The pay cap for senior executives was cut by then Finance Minister Brian Lenihan to €500,000 from the levels recommended by a government committee, which had proposed a €690,000 salary for AIB, for example.

The rules here are tough, but not uniquely so and comparisons with London may be unfair as it campaigned against EU bonus caps.

In Spain, legislation was passed in 2012 which limited executive remuneration at four nationalised banks to between €300,000 and €600,000. This measure led to a 75pc cut for the Chairman of Bankia, whose salary fell by a whopping €1.7mn to €600,000.

Iceland famously did not bail out its banks, but it did jail bankers for their role in the economy's collapse,

If Mr Pym is serious about removing some of the more heavy-handed controls over AIB, then he will have to come up with alternatives to reassure taxpayers there will be no re-run of the 2000s. The bank put proposals to its AGM that would allow the resumption of bonuses and offered safeguards in return, such as delayed vesting and payouts linked to the State's ability to recover taxpayer cash.

What the proposals - backed by top management and voted down by Finance Minister Pascal Donohoe who acts on behalf of the state's 70pc shareholding - failed to address are the risks inherent in the industry's compensation structure.

Academic studies show banks that have higher aggregate pay, controlled for size, are riskier. A 2011 study demonstrated that bank CEOs with the highest equity reward were more likely to lead their banks to losses in financial crises.

Research from Warwick Business School Professor of Financial Economics Dr John Thanassoulis shows that competition for bankers in the form of higher pay and other incentives lead directly to a rise in moral hazard. He suggests imposing a pay cap in proportion to the risk assets banks control which would reduce the competitive pull of hopping to another institution and would increase bank resilience and values.

The prospect of lower salaries across the industry would mean the AIB's bankers would have less incentive to jump ship, addressing the talent loss issue that so irks Mr Pym.

The question for AIB, which declined to comment beyond its statement, is whether they just want to tear up current regulations or whether they want a debate on the way forward for the financial services industry that will help reassure the most indebted population in Europe on a per capita basis that they won't be facing another large bill down the line. Each person here has €42,000 worth of reasons to expect that.